The Very Public Private-Sector Retirement Problem

The Great Recession was hard on private workers. Will states and localities have to rescue them?

Penelope Lemov is a GOVERNING correspondent. She was GOVERNING's health columnist and was senior editor for several award-winning features.

The 2008 financial meltdown and its continuing aftermath have not been kind to retirement accounts in the private sector. Those with 401(k) plans saw a chunk of their savings slip away, and that lack of pension coverage is set to become a huge state and local headache.

Older workers near retirement lost 25 percent of their assets in the financial crisis, says Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at The New School. Even more alarming, the percent of people without any retirement savings ticked upward. Today, 58 percent of private-sector workers have no pension savings at all. "For the last 10 years there's been a steady decline in coverage at work, whether it's a 401(k) or defined benefit," Ghilarducci says. "That's something we haven't seen in the last 40 years." When she broke out the numbers, she found that every state but two -- Oklahoma and North Dakota -- saw a decline.

Meanwhile, when current workers ages 50 to 64 reach 65, over 48 percent of them will be poor or near-poor, forecasts the U.S. Census Bureau's Survey of Income and Program Participation. "That's going to have repercussions for state and local governments," says Nari Rhee, a researcher with the Center for Labor Research and Education at the University of California, Berkeley. "They're responsible for providing services to the elderly who won't have the means to support themselves." The problem is particularly serious in California where access in the private sector to retirement plans shrank from 50 percent in 2000 to 37 percent today, according to a June survey by Rhee.

Not surprisingly then, it's California that's trying to address the issue. The Legislature is debating a bill that's a rehash of a pre-2008 proposal -- one that suggested accounts for employees in the private sector be setup and run by the California Public Employees' Retirement System (CalPERS) to take advantage of the pension plan's investment expertise and leverage in financial markets. CalPERS is no longer flying as high as a decade ago, so the new version of the bill doesn't link the new plan to the pension fund behemoth.

Rather, the latest iteration proposes that businesses in the private sector that are unable to set up 401(k) plans for their workers -- mostly small businesses -- give their employees access to a retirement savings plan through a trust fund set up by the state. The state would establish a board to oversee the fund, and employees could contribute a portion of their earnings to an account in their name. Employers could administrate it through a payroll deposit or some other hassle-free mechanism. When the employee retires, their savings account would be converted to a lifetime annuity.

Employee accounts would be modeled after an individual retirement account (IRA) rather than a 401(k). That means the amount each employee could put into the plan would be held to $5,000 a year or less, which self-limits the plan to lower-income workers, says Rhee. "For workers who make $100,000 a year, that's not going to be enough. For someone making $50,000, it starts to make more sense," she says.

The board would put management and investment of the retirement fund up for bid. Presumably, CalPERS would be a key bidder, though private investment groups would not be precluded from participating. If CalPERS or another pension fund, such as the California State Teachers' Retirement System, were to win the bid, the accounts would not be part of the defined-benefit portfolio. They would be a parallel set of accounts with a different -- and lower -- goal for rate of return.

According to a memo from the bill's sponsor, state Sen. Kevin de Leon, there would be no risk to taxpayers. "The measure will explicitly insure that financial liability rests exclusively with the private-sector underwriter that guarantees the conservative rate of return." That rate is expected to be around three percent. But despite de Leon's assurances, some still have looming questions about risks to taxpayers. What happens if investments don't perform well and employees decide to take their money out? What would stop them from bailing and leaving taxpayers' with the check?

The financial industry is less than enthusiastic about the bill. It has concerns about competition from the public sector, even though it hasn't shown much interest in marketing retirement plans to the $50,000-a-year employee.

The bill may not make it through the California Legislature. But if it does, Ghilarducci foresees an immediate reaction in other states. "A handful of states will follow suit quickly," she says, noting that Connecticut, Massachusetts and New York City are also considering policies to expand private-sector pension access.

If it doesn't pass, it's back to the drawing board. Still, the potential mess is heading straight for state and local coffers.